ITAR Dilemma: Finding The Balance Between Regulation And Profit

America’s commercial space industry holds a dominant position in the global market, but due to a number of factors, other countries are beginning to gain more market share. Many small suppliers maintain that the primary problem is the International Traffic in Arms Regulations (ITAR), which threatens their survival while protecting the position of larger suppliers.

The U.S. commercial space industry has been the global leader for more than 50 years, but as competition for contracts has become more intense around the globe, ITAR — a set of government regulations that controls the export and import of defense-related articles and services on the U.S. Department of State’s Munitions List — has been inhibiting the growth of thousands of small U.S.-based suppliers while protecting the larger providers, according to some industry officials and observers. Charles Huettner, executive director of the Aerospace States Association, warns that ITAR, which began initially as a nuisance to U.S. businesses, has evolved into a serious problem. “ITAR has led to increased global competition and is a significant impediment to the U.S. space industry’s ability to market to foreign buyers resulting in decreased sales and competitiveness,” he says. Regulators do not seem to grasp the unique balance that makes up the systems that they work to protect in the name of national security. Can this be reversed? Can the weighing of national security and the global economic realities lead to a more realistic oversight, or is it time to eliminate ITAR?

Rise in Global Competition

The goal of ITAR is to advance national strategic objectives and U.S. foreign policy, and the list of ITAR-controlled technologies is modified continually to meet that goal. One change that had a huge impact on the satellite industry came after the U.S. Department of State charged Space Systems/Loral with violating the Arms Export Control Act and ITAR following a February 1996 launch failure of a Chinese Long March rocket. As a result, Congress in 1999 passed ITAR authority from the Department of Commerce to the Department of State and since then, the balance has been tilted toward national security over profit margins, as technology related to satellites and launch vehicles became more rigidly protected. ITAR today controls satellites and all specifically designed or modified systems or subsystems, components, parts, accessories, attachments, and associated equipment for satellites as well as many dual-use technologies such as software, integrated circuits, computers, electronics and security-related information systems that are vital for satellites and launch vehicle technologies.

The unintended impact of the regulation change has been that countries such as China, Pakistan, India, Russia, Canada, Australia, Brazil, France, the United Kingdom, Italy, Israel, the Republic of Korea, Ukraine and Japan have grown their commercial space industries, while U.S. companies have seen dramatic losses in customers and market share. But the economic impact on the U.S. industrial base has not been caused solely by ITAR’s classification of communications and other commercial satellites as “weapon systems.” The decline has been aided by the technology outsourcing and offshoring business models that are fueling today’s business profits. The underpinning of the U.S. commercial space industry is the extended supply chains that begin with a simple fastener and move to components, subsystems and systems until the transformation process results in a satellite, ground system and a launch vehicle, but the same time U.S.-based companies are having difficulty exporting some products, that work also is being sent overseas.

Figures released in May by the U.S. government stated that 40 percent of domestic market growth came from exports, and world turnover generated from commercial and government contracts is projected to reach $158 billion by 2010. But despite these numbers, a study released the same month by the American Institute of Aeronautics and Astronautics (AIAA) alleges that U.S. rules restricting exports of American military technology are harming the U.S. aerospace industrial base, especially in satellite component sales. This impact especially is being felt within the satellite manufacturing market, where an increase in the complexity of satellite architectures, size, power, software, components, subsystems, systems and broadband applications are further factors that are elevating concerns that ITAR will further shrink the U.S. industry’s market share. “The throttling of our U.S. based companies in achieving their export capability is slowly crippling our ability to generate the technology advances that guarantee that the U.S. remains economically strong and safe from harm,” says Frank Morgan, vice president of MCL.

Retired Air Force Maj. Gen. Craig Weston, vice president of SRA International Inc. and deputy director of the SRA C4ISR Center, says he wishes to see Congress “revisit the stringent ITAR provisions” that harm U.S. industry, because “ITAR actively discourages the exchange of ideas” between U.S. and overseas innovators. “ITAR is adversely affecting national security” of the United States. He specifically cites ITAR’s impact on satellite components. If U.S. components have technology the same as or less capable than overseas technology, then one should ask why U.S. components must continue to be subject to ITAR restrictions, he says.

While other nations have restrictions that their corporations face on exports of militarily sensitive technology, the limitations there are nowhere near as restrictive as ITAR regulations, the AIAA says, and because of ITAR restrictions, some overseas firms may not wish to have U.S. companies participate in joint projects, because an American firm would bring with it ITAR restrictions, the organization says.

The AIAA could not estimate how much U.S. industry would gain in foreign sales if ITAR restrictions were eased but says smaller firms at the second or third tier levels would benefit if components such as solar cells, batteries, traveling wave tubes, digital imagers, optical coatings, some integrated circuits, focal plane arrays and more were removed from ITAR control. “The report recommends that ITAR processes be frequently reviewed and adjusted, ITAR staffing adjusted, and restrictions regarding sales to U.S. Allies are reexamined to reflect geopolitical and economic considerations.”

ITAR-Free Items

Along with losing potential international business and partnerships, an unintended consequence of ITAR is that in some cases, when U.S. sales of a certain type of item are barred by the U.S. government, foreign companies may develop that technology themselves and become competitors. Many small- and medium-sized companies see a contradiction in a U.S. policy that supports the exporting of U.S. jobs and technology in the form of licensing and royalties but restricts the actual selling of U.S.-produced technology products to some countries. In some cases, allies have rushed into these space-based technology markets to grow their own economies and create jobs for their own work forces.

European satellite manufacturers EADS and Thales Alenia Space now are promoting “ITAR-free” satellites and defense items which basically are based on off-the-shelf-technology that any consignee or purchaser can obtain. Thales Alenia Space will be building an “ITAR-free” satellite, Palapa-D, so that it can be launched on a Chinese Long March rocket. The satellite, which will be placed in orbit in 2009, will carry 24 standard C-band, 11 extended C-Band and five Ku-band transponders covering Asia, the Middle East and Australia.

“Export controls can and often do benefit American industry and workers,” says Don MacDonald, staff director of the subcommittee on Terrorism, Nonproliferation and Trade and legislative aide for U.S. Rep. Brad Sherman (D-Calif.). “Until the advent of the ‘ITAR-free’ phenomenon, American regulations affected all satellites and related technology, creating a level playing field.” he says. But the U.S. State Department embraces the view that “ITAR-free” items are anecdotal and not systemic and that European firms employ “ITAR-free” as a marketing tool to gain a competitive edge over the once dominant U.S. satellite and launch manufacturers.

The international companies also are benefiting from ITAR’s impact on U.S. higher education institutions such as Stanford University, the University of Michigan and MIT, which argue that ITAR prevents the best international students from studying and contributing in the United States and prevents cooperation on international scientific projects. “We have a large portion of foreign students (in space-based technology research),” says Robert Twiggs of Stanford’s Space Systems Development Laboratory. “… We cannot take advantage of all of the talent … due to ITAR restrictions.”

Thomas Zurbuchen an associate professor in Michigan’s Department of Aerospace Engineering says, “ITAR also discourages the best students from attending U.S. universities and contributing to and enhancing the excellence in our space research.” Zurbuchen believes the Department of State cannot build a wall around progress in space-related engineering and hide it from the world, and if the industry does not collaborate with space-based engineering resources in China or Europe, innovation will develop by itself outside of the United States, he says. U.S. universities also recruit graduate students from overseas and train them to develop the technology, but instead of being allowed to work in the United States, ITAR restrictions mean they compete against U.S. companies, helping other countries develop technology that falls under ITAR regulations. It is the conclusion of academia that if ITAR restrictions are not lifted, the foreign science and technology groups that they actively promote with will go their own way and institutions will be left out in the cold.

David Logsdon of the Space Industry Council sees a “rising storm that the industry must be prepared for by 2018. First, the U.S. industry skill base is rapidly diminishing and not being replenished,” he says. “Aerospace technology skills are rapidly developing overseas and secondly, smaller U.S. companies are feeling the blunt of the cost for export control compliance which leaves them few funds for [research and development] that creates new innovations and new business models.”

Some Headway

The State Department sees no drag on the U.S. space industry and insists that the security benefit to the nation is something that businesses must bear, but industry as a whole .continues to refute this belief. “The primary issue that has been dragging down the industry and giving ITAR a bad name is the [State Department], which has simply failed to implement National Space Policy as articulated in [the Department of Commerce’s] Department of Space Commerce; namely that it is in the interest of the United States to foster the use of U.S. commercial space capabilities around the globe and to enable a dynamic, domestic commercial space sector,” says Dave Payne, a space, satellite and networking technology consultant based in Silicon Valley. ITAR management should be returned to the [Commerce Department] or should be staffed at the [Department of State] with space professionals with backgrounds in space business and not by career State Department personnel. How can these career unionized bureaucrats recognize leapfrog technology advances afforded by cross component synergies on an architectural level?”

The U.S. government has made some allowances in the ITAR battle. In January, President Bush signed a package of directives to reform U.S. defense trade policies and practices. According to a fact sheet released by the U.S. Department of State, “the package of reforms required under this directive will improve the manner in which the U.S. Department of State licenses the export of defense equipment, services and technical data, enabling the U.S. government to respond more expeditiously to the military equipment needs of our friends, allies and particularly our coalition partners.”

While ITAR was not specifically mentioned, the State Department fact sheet could be seen as a foot in the door, says Remy Nathan, director of international affairs at the Aerospace Industries Association. “When it comes to satellite components manufacturers, I would argue that to the extent that they are dealing with items that are munitions list items, they will benefit just like everyone else with the ability to get these licenses processed in a more predictable, efficient and transparent manner,” he says. “I’m encouraged by the fact that the State Department singled out for attention the commodity jurisdiction process and talked about how they’re going to try to take steps to ensure effectiveness and efficiency. That potentially creates the opportunity to evaluate that mechanism and make sure it’s functioning appropriately to balance out the consistent needs of U.S. national security and economic and competitive imperatives. If you make sure it’s working right, then you might be able to feed in thornier issues that we’ve had in the past and see what comes out.”

Conclusion

A shift may be taking place in the thinking of some in the government on the business impact of ITAR, as the U.S. technology dominance is being threatened, but there does not yet appear to be a real joint effort to balance the objectives of national security and the goal of maintaining U.S. superiority in sensitive dual-use.

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